[r9etb]

The "few bad apples" comment was in reference to those mortgage originators who sold completely unqualified people mortgages they knew would fail.

And yet the mortgage market cratered under the load of a large number of bad loans. Either those few bad apples worked really hard, or there were a lot more than a few of them.

However, the point of the collapse is that, due to the high concentration of sub-prime mortgages and the accelerating default rates, what was a very safe, highly liquid security now has no value and no market.

This contradicts what you said before. Clearly the basis for those "safe, liquid securities" was false to begin with -- as shown by the '99 NYT article that JimRob posted the other day. It was obvious even then that the "safety" of those investments was illusory: "In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's."

[Renkluaf]

I'm certain that those "bad apples" did work quite hard given the "relaxed" underwriting standards supported by the Boston Fed pamphlet. Add to that the legions of "marginal" applicants who believed they could stretch to handle a mortgage under the assumption rates would remain low. Keep in mind from a mortgage broker's perspective, after you've gotten the "prime" customers to refinance once, twice maybe three times, the hunt for new customers redirects in mass to the one area that remains underpenetrated but the highest risk - sub-prime.

As to the second point, the MBS market HAD BEEN for many decades the safest and most liquid of markets. What the buyers of those MBS did not know was the underlying changes taking place in the quality of the mortgages functioning as collateral for those securities.